Yeah, i see that...Looks real good if the images would pop in there.
Your view source shows this:
<img src="/v416/default_image.gif" alt="Antenna Pennants" />
Mine shows this:
<img src="http://www.misdefenseproducts.com/images/C/diversion-safe-DS-PEANUTBUTTER.jpg" alt="diversion safe" />
That it pulls from this part in the code:
<img src="
{if $subcat.icon_url}{$subcat.icon_url}{else}{$xcart_web_dir}/self-defense-weapons.jpg{/if}" alt="{$subcat.category|escape}" />
I suppose you've discovered that yours is pulling from the else condition.
I'm not an expert, but the highlighted part above seems to not be picking up. I'm sure you've been around this already. If the image shows in your admin side, it should pick that part up and display it.
My first thought would be some path problem somewhere. I guess this is as far as I can go with this. Maybe someone else can help you. Sorry! When you get it fixed, please let me know what it was. I'm curious because this should be working for you, same version, same code. Hmmmm.
Perhaps it could be permissions or something. I'd troubleshoot by adding a hard coded url to an image in your images/C directory over the highlighted part and see if it picks up. If it does then put the code back and it shouldn't be permissions on the directory, its somewhere else. Just a thought.